Brazil’s real middle-class consumers

“It’s not for me”, I said apologetically.

My wife looked at me disapprovingly as I placed the two large bottles of whisky on the counter.

She already knew what I was up to. But, she wanted to make sure I didn’t feel too comfortable with the situation.

We were in the duty free shop, killing time before our flight. This is what we usually do: sniff perfume and buy whisky.

The bottles of Johnnie Walker Black Label were on offer. They’re prohibitively expensive in Brazil. In fact, they cost twice as much as they do where we live – Switzerland, one of the most expensive countries on Earth.

My strategy was simple and time-tested. When I arrived in Brazil with my humble offering, my wife’s family would treat me like a hero. Whisky is after all, really expensive in Brazil.

In fact, there are a lot of things that seem expensive in Brazil like, tic tac breath mints, Pampers diapers and lavender L’Occitane hand cream.

When I visited a shopping mall, my iPhone seemed unbelievably expensive. So, I decided to do some research.

I discovered that if you were to buy the same phone in cash from the Apple Store in Brazil (a matt-black iPhone 7 with 32GB of storage), it would cost you R$ 3,499 (US$ 1,120). That same handset, assembled in China, costs US$ 649 in the US.

This is such a big price difference that if I flew from Sao Paulo to Miami, purchased the same iPhone and flew back, I would save money. Check it out on skyscanner.com if you don’t believe me.

Brazil’s draconian import duties are of course usually blamed. The government slaps on a 60-percent flat import tax on most imported retail goods. However, like a lot of things in Brazil, it’s not that simple. The multiples I’ve seen go well beyond the effects of onerous import taxes. Something doesn’t add up.

Most Brazilians know about this already. It’s called Custo Brasil (“Brazil Cost”), which refers to the higher operational cost with doing business in Brazil thanks to excessive regulation, poor transport infrastructure and services, and of course corruption.

Import taxes may not, therefore, be the main culprit why iPhones are so expensive in Brazil. Let me explain.

Foxconn is a Taiwanese manufacturer that is contracted to assemble many Apple products, including the iPhone. A few years ago it started making iPhones in Brazil.

These are the only iPhones on the planet that you will find assembled outside China. On the back of the phone, “Indústria Brasileira” replaces the usual “Assembled in China” wording. There are also a number of pictures circulating on the internet that show this.

Of course these handsets probably only account for a small fraction of the iPhones sold in Brazil today. When Foxconn’s factory was opened five years ago on the outskirts of Sao Paulo, it was hailed a success by the Brazilian government.

However, it only created a small fraction of the 100,000 jobs that the government estimated. Most of these roles are low skilled. It also did little to help Brazil’s very promising fledgling tech industry. What’s more, the iPhone is now more expensive than ever in Brazil.

There is a reason why I chose the iPhone. For the past ten years, the investment management industry has been selling this story about the emerging middle class and their newfound wealth, plus their aspirations to show it.

In Brazil, they account for over 100 million people and represent the largest section of Brazilian society – called the lower middle class – as the chart below shows.

It’s true that significant progress has been made to lift the poorest Brazilians out of poverty in recent decades. It has given the lower-middle class a lifestyle better than their parents could have imagined. However, Brazil is now the midst of a deep recession. It’s the worst ever experienced since 1901. Therefore, it’s difficult to relate a new found sense of affluence with this section of society, which is now starting to shrink, forcing some back into poverty.

Corporate investment in Brazil has fallen, household incomes have dropped and millions of these lower middle-class people have lost their jobs. Of course, economic cycles come and go, but confidence, both economically and politically is now low in Brazil.

Progress is still being made however. The seeds for long-term social progression have already been sown. The pre-World Cup riots, former President Dilma Rousseff’s impeachment and the rise of social media have created a degree of empowerment and transparency never experienced before in Brazil.

There are of course some serious structural issues that need to be overcome.

These go beyond just an issue of Custo Brasil. There is also an element of Lucro Brasil (“Brazil Profit”) as well, where large businesses get away with higher margins that would normally be competed away in a well-functioning free-market economy.

The choices Brazilians face are very binary: you either choose between “low-quality” or “over-priced” goods. It’s a situation that some argue, help maintain the disparity of wealth in Brazil. Many people I spoke to feel that today the value of a person as a result is measured by the possessions they own.

The choice between low-quality and over-priced is therefore not just divisive, but also exploitive. There is a pressure for some to overpay for designer labels and other luxury goods. It creates a temptation to borrow.

“Would you like to split the payment three times”, the shop assistant asked.

Perplexed, I looked towards my wife.

“Why would I want to pay for a ten-dollar pair of Havaianas flip flops in three monthly instalments on my credit card?” I asked her.

“You can do that here”, she explained.

Borrowing in Brazil is easy, regardless of your background. The availability of credit is important and can help increase the financial dynamism of an economy by increasing the velocity of money and supporting the multiplier effect, which increases the supply of money and leads to greater economic growth.

It’s great in theory, but there are limits, especially when credit is being made available to the most vulnerable in society. While wealth can compound upwards, debt compounds completely the wrong way. And, this is definitely not what Brazil needs during a deep recession.

However, despite the structural challenges Brazil faces, progress is being made. President Michel Temer, though deeply unpopular, has passed laws to limit Brazil’s budget spending. He has also started difficult pension reforms and is planning to pass three more reforms on education, labour and tax before the next elections in 2018.

Our gate number was announced and we board our plane, bringing on board our bags of whisky. One of the flight attendants smiled as she heard the clink of the bottles. Sat comfortably in our seats, the pilot explained our route over the Atlantic Ocean and my daughter listened carefully.

Translating his words from Portuguese, she asked in English, “Daddy, when he gets us to South America, can you tell him to go to Brazil?”

Some of the other passengers laughed. I did too. But her question strangely made sense. Brazil is a huge country – a mini-continent in itself.

As the plane took off, piercing through the gloomy rain clouds, I looked out my window and sun was shining once again.